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Reliance Infra: Taxing times

Jun 2, 2010

Power to EPC major Reliance Infrastructure recently announced its FY10 results. On a standalone basis, the company has reported a 2% YoY growth in its sales while net profits have grown by a marginal 1% YoY. Here is our analysis of the results.

Performance summary

Operating margins improve to 11.2% for the standalone entity in FY10. Margins decline to 10.2% on a consolidated basis. Higher cost in the EPC business lead to this decline in margins.

A sharp jump in taxes hurt the bottomline - net profit grows by just 1% YoY for the standalone business during FY10. Consolidated profit up 12% YoY.

Declares dividend of Rs 7.1 per share (yield of 0.7%).

Financial performance snapshot

Standalone

Consolidated

(Rs m)

4QFY09

QFY10

Change

FY09

FY10

Change

FY09

FY10

Change

Sales

24,092

26,439

9.7%

98,686

100,273

1.6%

128,447

148,648

15.7%

Expenditure

22,533

23,725

5.3%

88,377

89,081

0.8%

114,352

133,445

16.7%

Operating profit (EBDITA)

1,559

2,714

74.0%

10,309

11,192

8.6%

14,095

15,203

7.9%

Operating profit margin (%)

6.5%

10.3%

10.4%

11.2%

11.0%

10.2%

Other income

2,824

1,668

-40.9%

7,379

7,898

7.0%

6,978

8,249

18.2%

Interest

1,013

581

-42.7%

3,305

2,922

-11.6%

4,394

5,251

19.5%

Depreciation

627

907

44.6%

2,449

3,198

30.6%

3,304

4,724

43.0%

Profit before tax

2,743

2,895

5.5%

11,934

12,969

8.7%

13,375

13,476

0.8%

Tax

(719)

384

-153.4%

546

1,453

166.3%

783

1,498

91.3%

Share of profit in associates

NA

NA

NA

NA

934

3,215

244.3%

Minority interest

NA

NA

NA

NA

(7)

(2)

-75.0%

Profit after tax/(loss)

3,462

2,511

-27.5%

11,389

11,517

1.1%

13,532

15,194

12.3%

Net profit margin (%)

14.4%

9.5%

11.5%

11.5%

10.5%

10.2%

No. of shares

226.4

244.9

226.4

244.9

Diluted earnings per share (Rs)

47.0

62.0

P/E ratio (x)

22.5

17.1

What has driven performance in FY10?

Reliance Infrastructure (RIF) saw a 16% YoY growth in consolidated sales during FY10. This was a result of a 31% YoY growth in its EPC & Contracts division (22% of total sales). This segment currently has an order backlog of Rs 192 bn, and is working on 5 power projects of over 7,500 MW and 2 road projects.

As for RIF’s electrical energy division (78% of consolidated sales), sales grew by 12% YoY during the year. However, standalone sales for this division dropped by 12% YoY. This was largely owing to a 16% YoY decline in power tariffs. The performance would have been worse but for a 6% YoY rise in volume sales of electricity. As for RIF’s Delhi distribution business, sales grew by 10% YoY during the year, led by an equivalent growth in volume sales.

Segment wise performance

Standalone

Consolidated

FY09

FY10

Change

FY09

FY10

Change

Electrical Energy

Revenue (Rs m)

73,696

65,054

-11.7%

103,188

115,345

11.8%

% share

74.7%

64.9%

80.3%

77.6%

PBIT margin

8.5%

8.4%

7.0%

7.2%

EPC and Contracts

Revenue (Rs m)

24,990

35,219

40.9%

25,259

33,048

30.8%

% share

25.3%

35.1%

19.7%

22.2%

PBIT margin

8.2%

8.1%

7.3%

7.3%

Roads

Revenue (Rs m)

253

% share

0.2%

PBIT margin

61.2%

Total*

Revenue (Rs m)

98,686

100,273

1.6%

128,447

148,646

15.7%

PBIT margin

8.4%

8.3%

7.0%

7.3%

* Excluding inter-segment adjustments

RIF recorded a decline in its cost of power purchased from external sources. For the consolidated business, these costs declined from 48.4% of sales in FY09 to 46.8% in FY10. However, the benefit of this was not felt on the company’s operating margins that declined by 0.8% YoY to 10.2% in FY10. Higher staff and EPC costs led to this decline in overall margins.

Despite a marginal 8% YoY growth in operating profits during FY10, RIF’s net profits grew by 12% YoY. This was led by higher other income and significantly higher share of profit in associates. The profit growth would have been even higher but for a sharp 91% YoY rise in taxes. The company’s effective tax rate stood at 11% in FY10, as against 6% in FY09.

What to expect?

At the current price of Rs 1,060, the stock is trading at a multiple of 15.7 times our estimated FY12 earnings. RIF’s FY10 standalone sales have come in line with our estimates. Its profits are however lower than our estimates owing to higher taxes. The company continues to focus aggressively on the EPC business.

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